Taxation Law in Australia: Assessable Income - Coursework Example

Running head: TAXATION LAW IN AUSTRALIA Taxation law in Australia Name: Course: Tutor: Date: Taxation law in Australia Assessable income Australia, like any other country has well formulated rules and Acts that govern the payment of taxes by the residents. Taxes are very important to the government as they form the major source of revenue for state funding and government expenditures. Taxes are not optional but they are compulsory obligations that the residents or citizens of a certain nation should pay to the government (Harvard Law School and Brudno, 1958). The taxes paid are mostly used in the provision of public goods and services to the society. The essence of the provision emanates from the very nature of the public goods and services which include the externalities. The fact that there is no direct benefit and outright ownership of these goods makes people feel that they should not pay for them. It is for this reason that taxation comes in to protect the interest of the society in their provision as well as others like the security and national defense (Mills, 1925). For taxes to be paid the determination of the income is paramount. This calls for the assessment of the individuals’ income from various sources like salaries and wages, rent, business profits, dividends from investments, interest from bank accounts just to mention but a few. The above items can be referred to as the components of income. The process of determination of their sum total is referred to as the assessment of income thus assessable income. It should be differentiated from taxable income. The latter refers to the income net of all tax deductions or tax allowable. Tax allowable is an expense that does not qualify as expense for tax purposes. Tax laws and practices require that such expenses should be added back or subtracted if it had been added to the assessable income to arrive to the taxable income (Australia and CCH Australia Limited 1979 Pp 240). According to the plan arrangement between the Australian government and our client, the ACT Solar System Limited on the ways to encourage the use of solar system by giving tax deductions some customers is to benefit by claiming these deductions. For the purposes of taxation the person who undergoes the cost of buying and the installation should be allowed to claim for the tax deductions. This is because the cost of buying a solar system and consequently the installation is an expenditure that can not be attributed to just one particular accounting period. The benefit of the cost is expected to spill over to the future accounting periods. The cost and installation is considered a capital expense and therefore not a tax allowable expense. However a person is allowed to claim for the tax deduction for machinery in what is referred to as the ware and tear deduction (Mills, 1925). The system owners are also entitled to claim deductions under the gross or the net feed in tariffs. Both the gross and the net feed in tariffs are assessable income. They are however calculated differently. A gross feed in tariff pays for any surplus energy produced whereas the net feed in tariff pays for each kilowatt produced by a grid connected system. An income from a feed in tariff system is taxable depending on the nature of the operation. If the feed in tariff is one that is commercialized and therefore profits are realized then there is no deduction to be claimed. On the other hand the owners of the feed in tariffs for domestic purposes should claim for deductions. According to the ACT’s Electricity feed in (renewable Energy Premium) Act 2008 in Australia , the electricity producing firms are encouraged to buy electricity from households and then the government extends a feed in tariff to the household there by allowing them to claim for tax deductions. It is not all the expenses of a business or any organization that qualifies for deductions in the calculation of taxable income. This brings the difference between the business and organizations profits or income and the profit and income for taxation purposes. Some expenses deducted from the gross profit or income to arrive at the business profits are not deducted when it comes to determining income or profits for taxation purposes (Mills, 1925). For purposes of this paper we shall focus on two items namely the depreciation and the capital allowances. Depreciation is a notional expense that is deemed to have occurred in the course of the business. Generally speaking, it is the ware and tear that a machine is thought to have experienced during the production process. Tax laws and regulations acknowledge only those expenses that have actually occurred and not those that are thought to have occurred or their occurrence is not practical. Depreciation is a charge to the profit and loss account as an expense but in the actual sense it does not carry away any business resource. It is therefore considered a tax expense and should be added back to the business profit to arrive at the taxable profit. Capital allowances are the tax deductions that result from buying some assets for the business. The expenses undergone are precisely referred to as capital expenses. Capital allowances are categorized in various groups depending on the nature of cost experienced. They include; industrial building deductions for new buildings, ware and tear for machines bought and installed investment deductions for new investment projects among many others. Capital allowances are calculated based on certain percentage depending on the type or the class of the asset. The persons who buy the solar system from the ACT Company as per the discussion question are entitled to a capital allowance to the extent of the set percentage of the cost. The essence of the capital allowance is to act as an attractive offer where the people who buy such assets can compel the government to reduce their tax liability. For instance the Australians who buy the solar panels are to enjoy the benefit of reduced tax liability expected from them. One important thing to note is that some of the capital allowances are extended beyond one accounting period. For instance, a machine like the solar panel which falls in class IV of the ware and tear has an effective life of 15 years. This means that the capital allowance will be amortized and enjoyed for 15 accounting periods. An individual or a company may tend to sell or dispose some of its assets in the business. The sale in this case is not in the normal course of the business. This means that the asset sold was not initially bought for resale purposes. If the asset is sold at a loss, the loss is referred to as a capital loss. On the other hand if the sale results to a profit, the profit is referred to as capital gain. Capital losses are not taxable whereas capital gains are taxable. The capital gains got from the sale of the properties are to be treated like any other income. In the installation of the solar panels by the ACT solar system limited the owners of private residences are not likely to enjoy any capital gains which will definitely have some tax implications. The reason for this is that the as per the ATO private ruling – No 9278, it states that ‘the credits and payments received for power generated by solar panels on private residents are not assessable for income tax’. It also states that ‘any outgoings and capital allowances are not tax deductible’. The tax implication is that the private residents despite their involvement in buying and installing the solar panels, they will not be given any deduction and indirectly this will be taken to have an additive effect to the tax liability of the private residents(Mills, 1925). Again the expenses undergone in their installation is not tax allowable. There are some checks that have been formulated to protect the interest of all the beneficiaries of the solar panel project. For instance the ACT Solar System Limited there is an Act referred to as the Electricity Feed-In (Renewable Energy Premium) Act. In this Act it is stated that payments are made to the occupier who is the retail electricity customer for the premises. These are people who actually par the bill and they are not necessarily the owners of the premises. Sometimes they are not the installers of the solar panels. For businesses such as the shopping center owners like the Westfield they are not likely to get any credit of payment from the solar panel project. This is because the Act stated above that only the occupiers should be paid. If the shopping centre owners are still the occupiers then they will enjoy all the credit and payments. The people who rent are more often that the occupiers. In this case they are deemed to receive the payment from the electricity authority. However, the income that they receive is not in their hands directly because it lands to the shopping centre owners who are often the people who buys and installs the solar systems. It therefore makes the amount of money that the owners expended non deductible because it is credited to the occupiers. In case the owners are the occupiers, the expenses would have been deductible. The owners of the premises therefore plan to come up with some plans on how this balance can be offset. The occupiers are deemed to enjoy credits and payments which they never contributed to generate. On the other hand the owners are to have bought and installed the solar panels the benefit of which goes to the occupiers. The balance is mostly offset by increasing some rental charges by the owners which will have the effect of sharing the credit and payments received by the occupier (Books and LLC, 2010). The rise in the rental charges is a process that will help the owner or the installer to try to cover up the cost of buying the solar system though not in lump sum but in small installments of monthly of quarterly basis. It can again be taken to mean the covering of the running cost like servicing and maintenance. When one of the renters is on a lease he is entitled to all the credits and payments. Under the condition of lease the lessee is left to be in charge of all the premises under him and undergoes all the serving and maintenance costs. Consequently the lesser is not involved in the running of the premises because he is supposed to have included all his charges in the leasing charges. In some cases the Australia government has made houses and premises which it has rented to the public. The houses are not exception from the credits and the payment from the ACT program. In fact, the government is working hard to install all its premises to ensure that it will lead other premises owners by leading from the front. It is setting a pace which all other persons are expected to follow. In this case the government is paid the credits and payments and the money is received through the government of Australian account. The government then uses the money to reduce the cost of running its operation (Mills, 1925). And because the provision of electricity is a government project by reducing its expenditure on the provision of electricity to the public will allow it to channel its funds to other development projects. The determining factor for the eligibility to the credit and payments from the ACT program is dependant on the nature of the business. But if the business is already receiving some net gross payments and credits on the solar panel fixed on their roof tops then the only question that becomes the implication of the installation. For the small and the large business the extent of the benefit will depend on the level and capacity which the business can save the electricity. This will again show the difference in the calculation of the gross fed-in tariff or the net feed-in tariff. The credits and payments given to the small or the large business have the implication of reducing the cost of running the operations. The utilities especially the electricity bill which consumes a major portion of the business income is saved. This is seconded by payments on any other unit of power that have been unused during that production time. Australia has experienced a lot of difficulties in the production of electricity a factor that makes the cost charged to be very high and especially unaffordable for small and upcoming business. The effort by the government to come up with some other renewable resources cannot just be gotten that easy. It is for this reason that the government acts to try and give back a hand to the businesses trying to use some other renewable resources (Australia and CCH Australia Limited, 1979). In terms of the credit and payments received due to use of other energy providing systems other than the electricity it does not matter whether the business owns or rents the property in which it runs the business. What is important here is number of kilowatts that the business is saving. The only impact as indicated above is the arrangement that have to be made in case the premise is a rental one. The credits and the payments are dividend on an agreed rate between the owner of the premises and the business person on rent. Generally the Australian program with the ACT offers a 60 percent to 40 percent on the business operator and the power providers respectively. For the business which operates as sole traders, partnership, joint tenancy, trust or company the result will come as a result of the taxation basis. The sole traders will enjoy the credits and the payments as well but the taxation of the sole trader is based on the income of the owner not on the profits of the business. On the taxation of the income the business man the tax liability will be reduced by the extent to which the credits and payments are met. For the partnership the taxation is also done on the partners’ income. The profits are shared as per the agreed ratios and any other income is summed up. The credit or the payments received from the ACT program is determined and the deducted from the income to arrive at the taxable profits. In the case of the house being owned by a trust or a company the credits and payments are received by the occupiers as normal. Due to the huge size and capacity of the company the credits or the payments can be converted to some other valuable assets. For instance the some companies in Australia have arrangements where the credits and payments are converted to securities and stocks. The occupier of the house can then continue to receive the dividends in the future dates. The tax effects are experienced at the capacity of the company with the correct corporation rate. The houses on the trustee are also entitled to the credit and payment but the arrangement have to be made again on the compensation procedure of the occupier. The Goods and Service Tax (GST) is a major factor to be considered for taxation purposes. The remittance of the good and service tax is important in the determination of the feed-in tariff that one is expected to submit. However, individuals are not required to submit their goods and service tax from their feed-in tariffs (Australia and CCH Australia Limited, 1979). This is because the process will involve selling the electricity back to its providers forming a certain kind of an enterprise. The difficult thing for the individuals is that it will require them to be receiving $75,000 per annum to be eligible for goods and service tax remittance. On the other hand the hand the business and company are required to submit their remittances fro the goods and services tax. The general assumption is that the businesses have the capacity to receive approximately $75,000 per annum. This earns them an express right to remit goods and service tax for their feed-in tariff income. In this case therefore goods and services tax remains a strong factor which depends on whether an individual or a business. In cases where the owners of houses are not residents of Australia they are also subjected to some taxation on certain conditions. The tax rule requires that any income that is generated in Australia whether by a resident of non resident to be taxed in Australia. This means that the incomes of the owners of the houses who are not resident in Australia should be taxed but only to the extent that was generated in Australia (National Library of Australia, 1980). Again if the owners’ nonresidents have engaged in the ACT program they are also entitled to the credit and payments as well. In conclusion the idea of having tax deduction for the people who uses other energy sources is a great step in Australian economy. It has until now indicated a drastic reduction in the cost of electricity I Australia. The government is also improving the private sector by agreeing to buy power generated through other renewable means, a practice which is not encouraged by some countries. In this way Australia is in a position to reduced cost of electricity and improves the economy. References: Harvard Law School, Brudno, W. 1958, Taxation in Australia. Little, Brown Press Mills, S. 1925, Taxation in Australia. Macmillan and co., limited Press Books and LLC. 2010, Taxation in Australia: Capital Gains Tax in Australia, Superannuation In Australia, Tertiary Education Fees in Australia, Taxation in Australia. General Books Press Australia and CCH Australia Limited.1979, Australian income tax legislation. CCH Australia Limited Press National Library of Australia, Commonwealth National Library (Australia). 1998, APAIS, Australian public affairs information service: a subject index to current literature. National Library Australia Press National Library of Australia.1980, Australian national bibliography. 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